Ha'aretz reported that Israel and the PA are both unhappy over a
request by Secretary Rice that they publish a memorandum of
understanding on the progress of final-status negotiations to date
before President Bush arrives next week. Ha'aretz quoted a GOI
source as saying that Rice wants such a document to make it clear to
the international community that the negotiations are indeed
progressing. Prime Minister Ehud Olmert and PA President Mahmoud
Abbas held another meeting yesterday after which the government
source said "there has been great progress on the issue of the
borders of the Palestinian state." Other leading media quoted
"sources in Jerusalem" as making similar comments. Ha'aretz's
source was quoted as saying that there had also been considerable
progress on the issue of security arrangements. However, Ha'aretz
reported that Rice told Israeli officials during her visit that even
though both sides had reported progress, "the world doesn't believe
it." The fact that no concrete document has yet emerged from the
negotiations, combined with the lack of dramatic progress in
improving the daily lives of Palestinian residents of the West Bank,
encourages disbelief, she argued, and this is liable to undermine
the process. She therefore suggested formulating a memorandum of
understanding that would outline the general principles to which the
parties have agreed -- mainly on the issue of borders, but also on
the other core issues.

Ha'aretz reported that both the Israeli and Palestinian officials
with whom the Secretary met expressed reservations about the idea.
"The work of drafting such a document will merely halt the progress
and the momentum," argued one Israeli official. "Instead of
negotiating, we will start dealing with commas and periods in the
draft and try to steal corners from each other," added another.
"Both Israel and the PA say the talks have made significant
progress, but both would prefer to keep this progress under the
media's radar for now. The main progress has been on the issue of
borders -- the fate of the settlement blocs, territorial exchanges
and the 'safe passage between the West Bank and Gaza. Jerusalem has
not yet been seriously discussed, and on the refugees, both sides
have merely presented their initial -- and highly divergent --
stances." Yediot reported that Olmert's bureau deviated from its
norm yesterday and reported on actual progress in the negotiations
with the Palestinians on the issue of borders and security
arrangements. Ha'aretz quoted Palestinian sources as saying that
during her recent visit, Rice pressed both parties to finalize an
agreement on borders quickly, as that is the issue which all sides
view as easiest to resolve. According to these sources, Israel
initially expressed a willingness to cede 90% of the West Bank to
the Palestinians, while the PA demanded at least 98%. In
particular, Israel wants to retain the major settlement blocs and
the Jordan Valley, but the PA rejects these demands. Though some
progress has been made, the Palestinian sources said they saw no
chance of resolving these disputes in the 10 days remaining before
Bush's visit. The Jerusalem Post quoted PA officials as saying on
Monday that Israel was offering the Palestinians nothing more than a
"mini-state" of cantons. Makor Rishon-Hatzofe quoted Israeli
diplomatic sources as saying that the dialogue with the Palestinians
is one-sided: whereas the Palestinians voice their claims, Israelis
"mostly listen." Makor Rishon-Hatzofe cited the Palestinians' claim
that they have agreed with Israel on the borders -- the 1967 lines
with light amendments in the settlement blocs.

Ha'aretz reported that Israeli officials who met with Rice said
their impression is that she is determined to produce an achievement
at almost any price, given the political capital that both she and
Bush have invested in the Palestinian issue over the last year.
According to several media (like Ha'aretz and Israel Radio) Rice
also expressed grave concern over the latest police investigation
against Olmert, fearing that it would negatively affect the
negotiations. The media reported that the tight secrecy around
Olmert's police investigation will continue. Some media reported
that a significant development in the case will take place today.
Yediot reported that a probe by the State Comptroller triggered the
current investigation. Maariv and Makor Rishon-Hatzofe reported
that Shas is not ruling out an alternative government headed by FM
Tzipi Livni.

At Monday's meeting with Abbas, Olmert also promised to keep him
informed of the progress of Israel's indirect negotiations with
Hamas over a cease-fire in Gaza. Egyptian intelligence chief Omar
Suleiman is due to come here next week to present the agreement
Egypt has reached with the Palestinian factions and seek Israel's
approval. Ha'aretz reported that afterward, the cabinet will
apparently hold a special meeting on the subject.
Makor Rishon-Hatzofe cited the London-based Ash-Sharq Al-Awsat as
saying that FM Livni has received a new letter from Syria regarding
progress in negotiations between the two parties. Makor
Rishon-Hatzofe quoted Secretary Rice as saying in an interview with
Ash-Sharq Al-Awsat that the U.S. would not stand in the way of
Syrian-Israeli negotiations. Likud leader Benjamin Netanyahu was
quoted as sayng in an interview with Israel Hayom that the U.S.
presented him with the cancellation of the "deposit" (the Golan)
that the late PM Yitzhak Rabin had handed Syria.

The Jerusalem Post quoted the EU's representatives to Israel and the
PA as saying yesterday that the international community's efforts at
trying to weaken Israel should be reevaluated. However, they
stopped short of recommending engagement with Hamas.

Ha'aretz reported that yesterday Israel transferred 200 liters of
diesel fuel and 30,000 liters of gasoline to the UN Relief and Works
Agency (UNRWA) for its work in Gaza. According to Israeli
officials, this is enough for about a month. UNRWA has been
complaining for days that it lacks fuel for its operations, but
Israel said it could not transfer more fuel until Hamas emptied the
depot to which the fuel is delivered and thereby created space for
new deliveries -- which it finally did yesterday. Hamas had refused
to empty the depot for days, Israeli officials charged, thereby
creating an artificial shortage. However, the fuel transfer was
interrupted after a few hours by Palestinian mortar fire on the
depot. Also on Monday, Israel imposed a complete closure on the
territories, which will remain in force through Memorial and
Independence Days (Wednesday and Thursday). Maariv quoted a defense
source as saying that the severity of security warnings is
unprecedented.

All media, except the ultra-Orthodox newspapers, extensively
reported and commented on events marking Memorial Day, which will be
commemorated from this evening through tomorrow night. The nation
will mourn the 22,437 servicemen and women who have fallen fell
defending the modern land of Israel. Over the past year, 132
soldiers were killed in service to the state. The Jerusalem Post
reported that 1,634 civilians have been killed in terrorist attacks
since 1948.
Maariv reported that on Sunday the dissident MKs who broke off from
the Pensioners Party signed an agreement with billionaire politician
Arkady Gaidamak, according to which he will not be a cabinet
minister.

The Jerusalem Post reported that Jewish activists are hailing the

decision by the United Methodist Church -- at its General Conference
in Texas last week -- to abandon efforts to divest from companies
that allegedly contribute to Israel's occupation of the West Bank.

Ha'aretz reported that the Israel Philharmonic Orchestra is moving
to organize a free concert in New York City's Central Park in
September to celebrate Israel's 60th anniversary. The project will
cost $3-4 million and will come from donations.

Ha'aretz reported that Robert De Niro will build one of his
Japanese-themed Nobu hotels in Herzliya.

--------
Mideast:
--------

Summary:
--------

Veteran journalist and anchor Dan Margalit wrote on page one of the
independent Israel Hayom: "Ehud Olmert.... Please, step into the
shadows. The sooner you do so the better."

Former Ambassador to the U.S., former Minister of Foreign Affairs,
and former Minister of Defense Moshe Arens wrote in the independent,
left-leaning Ha'aretz: "Some past peace agreements have served as
invitations to war."

Senior Editor and senior business commentator Nehemia Shtrasler
wrote in Ha'aretz: "Israel's economic data on the eve of its 60th
anniversary are quite impressive.... [But] Israel is still a highly
unstable country, both internally and externally. It faces major
security threats and numerous economic and social problems."

Gershon Baskin, Co-Director of the Israel/Palestine Center for
Research and Information (IPCRI), wrote in the conservative,
independent Jerusalem Post: " I will be very happy to see the day
when the Palestinians have their own Independence Day to celebrate.
That day too will be a celebration for Israel and for Zionism."

Prominent Israeli-Arab journalist and editor Zuhair Andrawus wrote
in the mass-circulation, pluralist Yediot Aharonot: "We demand that
Israel become the country of all its citizens. Otherwise the
conflict between us will deepen, unfortunately, and take us to
places that neither the Jews nor the Arabs want to reach."
The Jerusalem Post editorialized: "No army and no economy can
function without an adequate, secure and dependable water supply.
This is something Israel certainly cannot boast about on its 60th
anniversary."

Block Quotes:
-------------

I. "Go Forth"

Veteran journalist and anchor Dan Margalit wrote on page one of the
independent Israel Hayom (5/6): "Ehud Olmert, you have restored the
word compassion to the public lexicon. Good. Be compassionate,
then, towards your family and relatives and friends, and even
towards yourself, and resign. Go forth from the Prime Minister's
Residence.... Don't make commitments in its name. Don't commit it
for your own sake. It is better to finish misdeeds in private.
Please, step into the shadows. The sooner you do so the better."

II. "Peace at Any Price"

Former Ambassador to the U.S., former Minister of Foreign Affairs,
and former Minister of Defense Moshe Arens wrote in the independent,
left-leaning Ha'aretz (5/6): "The Israeli government is engaged in a
frantic search for peace -- peace with Mahmoud Abbas, even a shelf
agreement, and peace with Syria. That seems like the most natural
thing in the world.... But if we have learned anything from history,
it is that even that is not always true. Some past peace agreements
have served as invitations to war.... The Golan Heights was
sovereign Syrian territory before Syria attacked Israel in the
Six-Day War. Does that not mean that it is only proper to return to
the Syrians this territory they lost during the war, even if it
means uprooting 30,000 Israelis who now live there? But that is not
the accepted rule of nations that come to peace agreements. The
aggressor nation is not entitled to all territory lost in a war.
That would mean that there is no price for attacking a neighbor....
According to newspaper reports, Prime Minister Olmert already has
informed Bashar Assad that Israel is prepared to cede the Golan
Heights to Syria. That hasty move needs some further thought, unless
all of Olmert's thoughts at this time are devoted to saving his
coalition."

III. "Still Far from Economic Independence"

Senior Editor and senior business commentator Nehemia Shtrasler
wrote in Ha'aretz (5/6): "Israel's economic data on the eve of its
60th anniversary are quite impressive.... [But] Israel is still a
highly unstable country, both internally and externally. It faces
major security threats and numerous economic and social problems....
But [our dependence on the world, social gaps, large public sector,
and poor education] ] are a drop in the bucket compared to the
enormous security burden. Israel's defense budget is already large
and oppressive, and it is expected to grow still further in the
coming years. No other nation in the world faces a genuine
existential threat from a country that openly threatens it with
annihilation. And if, to this Iranian threat, we add the threats
from Syria, Hizbullah, and the Palestinians, we are left with too
many fronts for one small country. These threats create an
atmosphere of uncertainty and perpetual fear of the future, which
results in reduced investment and lower growth.... Until a regional
peace agreement has been signed, one that includes both Syria and
the Palestinians, we will not be able to say we have achieved
independence."

IV. "Next Year in Palestine"

Gershon Baskin, Co-Director of the Israel/Palestine Center for
Research and Information (IPCRI), wrote in the conservative,
independent Jerusalem Post (5/6): "I will be very happy to see the
day when the Palestinians have their own Independence Day to
celebrate. That day too will be a celebration for Israel and for
Zionism. Today being pro-Israel by definition must mean that one is
also pro-Palestinian. The fate and future of these two peoples are
linked to find a way to live side-by-side in peace -- in two
separate states.... This year on Independence Day the papers are
full of articles about the next 60 years. I am more concerned with
the next year or the next two years. If we do not find a way to
depart from our control over the Palestinians in the next year or
two, then in 10 or 20 years from now we will be celebrating the
independence of the state that will emerge here through bloodshed
and struggle -- a very different state. It will not be a Jewish
state. It will not be a Zionist state. It will not be a state
where the Jewish people are a majority. So on this Independence Day
I wish wholeheartedly to all of my Palestinian friends, 'I hope that
you too will soon be able to celebrate your independence!'"

V. "Between Independence and Nakba"

Prominent Israeli-Arab journalist and editor Zuhair Andrawus wrote
in the mass-circulation, pluralist Yediot Aharonot (5/6): "I feel
absolutely no belongingness to Israel, its symbols, flag, and
anthem. A feeling of frustration overcomes me when the State of the
Jews celebrates its independence. I also believe that most Israelis
do not wish to grant [Arabs] the feeling of belonging to the state.
Thus, this is my homeland but Israel is not my country. Sixty years
have gone by. The Israeli narrative says 'independence'; our
narrative stresses the fact that in 1948 we underwent a catastrophe
(nakba). My compatriots were expelled to the neighboring Arab
countries, where they still live in inadequate conditions.... In
light of that gloomy situation, we are not going to make
concessions: We demand that Israel become the country of all its
citizens. Otherwise the conflict between us will deepen,
unfortunately, and take us to places that neither the Jews nor the
Arabs want to reach."

VI. "Water Independence"

The Jerusalem Post editorialized (5/6): "On the eve of Israel's 60th
Independence Day we can take pride in the fact that this nation has
become an irrigation pioneer and a global superpower in helping
other countries overcome their water shortages. Israeli
water-management systems and desalination plants are hits worldwide.
Yet this proverbial shoemaker goes barefoot. While Israel
successfully markets desalination plants worldwide and helps other
countries cope with their increasing thirst for potable water, at
home all this enviable know-how is barely put to use. The bottom
line reason is that our government -- especially the number
crunchers at the Treasury -- is cent-wise and dollar-foolish.
Procrastination is the default position. What can be put off
needn't be attended to and paid for now. In the short haul, this
approach spares us valuable outlays which can then be earmarked
elsewhere. But this shortsighted focus on the immediate pawns our
future. It potentially compromises our independence. No army and no
economy can function without an adequate, secure and dependable
water supply. This is something Israel certainly cannot boast
about on its 60th anniversary."

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